2. Outline
Lending Process
Traditional Lending vs Digital Lending
Pros and Cons of Digital Lending
Fintech and Digital Lending: Meaning
Digital Lending Ecosystem
Lending Service Providers
o Flow of funds
o Outsourcing in DL
Digital Lending Apps
o Norms related to DLA
Digital Lending Models
Balance sheet Lending
Off Balance Sheet Lending
Default Loss Guarantee
Consumer Protection under DL.
3. Lending
Journey of a Loan Transaction :-
Loan
Sourcing
Loan
application
Underwriting
Credit
Decisioning
Loan
Disbursement
Recovery
5. Pros and Cons of Digital Lending
Pros:
Faster processing- short turn around time for
loan disbursals
Wider geographical outreach
Wider credit intermediation and penetration
Reduced origination cost
Analytical credit decisions – maximum use
of algorithms and AI
Cons:
Market not adaptable to large value
loans
Mis-selling of products
Concerns on customer data protection
Concerns of fairness of lending
practices
6. Digital lending is a subset of Fintech
Digital lending is a remote and automated lending
process, largely by use of seamless digital
technologies for customer acquisition, credit
assessment, loan approval, disbursement,
recovery, and associated customer service.
Core principles of digital lending:
Use of digital channels
Use of digitised data
Focus on customer experience and engagement
Financial Stability Board (FSB) defines fintech
as-
“FinTech is technologically enabled financial
innovation that could result in new business models,
applications, processes, or products with an
associated material effect on financial markets and
institutions and the provision of financial services”.
RBI defines fintech as-
“Fintech is an umbrella term that refers to
technological innovation having a bearing on
financial services- intermingling of financial services
with technology”
The parts of a lending transaction that need to be digital or contactless in order to be called digital lending is
subjective but must involve, at least to a significant extent, the use of digital technologies as part of lending
processes involving customer procurement, credit assessment and loan approval, loan disbursement, loan
repayment, and customer service.
Meaning of Digital Lending
7. Digital Lending Ecosystem
Pay Cash
Finance
the
Purchase
Fund through
Fund Transfer
E-
Commerce
Platform
Sells Through E-
Com Platform
Payment through
E-Com Platform
Tie-up
Fintech
Platform
Balance Sheet
Lender
Financing
2
1
3
4
5
6
8. An agent of a Regulated Entity who carries out for a fee from the RE,
one or more of lender’s functions in customer acquisition,
underwriting support, pricing support, disbursement, servicing,
monitoring, collection, recovery of specific loan or loan portfolio.
On-boarding of LSPs shall be done by REs after “enhanced due
diligence
process”
This process should take into account, minimally, the following:
technical abilities,
data privacy policies and storage systems,
fairness in conduct with borrowers and
ability to comply with regulations and statutes
REs should carry out periodic review of the conduct of the LSPs
engaged
REs to draft process of review including periodicity
Review process to be carried out per draft
Meaning of Lending Service Provider
9. Collection and Disbursement accounts must be in the name of the RE
Loan servicing, repayment, etc., shall be executed directly in RE’s bank account without any
pass-through account/ pool account of any third party
Disbursement must be made to the account of the borrower
Exceptions allowed -
Disbursement covered under statutory/ regulatory mandate
Disbursement for specific end use per regulatory guidelines
Flow of money between co-lenders.
LSP not to charge any fees from the borrowers directly
Flow of Funds
10. Outsourcing to Lending Platform
The underlying principles behind these directions are that the regulated entity shall ensure that outsourcing arrangements neither
diminish its ability to fulfil its obligations to customers and RBI nor impede effective supervision by RBI.
A comprehensive Board approved outsourcing policy incorporating, inter alia:
criteria for selection of such activities as well as service providers
delegation of authority depending on risks and materiality
systems to monitor and review the operations of these activities.
Shall not outsource core management functions such as:-
Internal Audit,
Strategic and Compliance functions
Decision-making functions - Determining compliance with KYC norms for opening deposit accounts, according sanction for
loans (including retail loans).
Management of investment portfolio.
Board approved Code of conduct for DSA/ DMA/Recovery Agents and obtain their undertaking to abide by the code.
Recovery Agents refrain from action damaging the integrity and reputation of the NBFC and that they observe strict customer
confidentiality.
11. Mobile and web-based applications with user interface that
facilitate borrowing by a borrower from a digital lender.
DLAs will include apps of the REs as well as operated by
LSPs which are engaged by REs for extension of any credit
facilitation services.
DLAs collect KYC data (including PAN, Aadhar ID, other
forms of address and identity proofs), have access to
borrowers credit records including information from CICs,
bank statements and salary records.
Meaning of DLA
Technology and Cyber-Security
Standard
Grievance Redressal Mechanism
Audit Trail
Disclosure Requirements
Data Storage
Borrower Consent
Privacy
Digital Lending App
12. Norms relating to DLAs
Requirement of customer consent
Consent to the DLAs to access and use the customer’s mobile
phone (or other electronic devise) resources – camera, audio,
location, stored documents and images, etc. for KYC
Consent to the type of data that is actually collected
(personal information for the purposes of KYC, income and
credit information, etc.)
Consent to disclosure of the collected data to a specific third
party or a specific group of third parties
Consent to retention of the collected data by the DLA, RE,
LSP or other third parties
Facility to withdraw/revoke any of the above types of
consent
What can be collected?
DLA should only collect data on a need-basis for the purposes of
digital lending (e.g. for the purposes of borrower KYC, credit
underwriting).
How to be collected?
Explicit customer consent with respect to data collection, retention
and disclosure. Audit trail to be maintained. Purpose to be disclosed.
What cannot be collected and stored?
Mobile phone resources cannot be accessed, except one time access for
KYC. Personal information, except basic minimal data, and biometric
data should not be stored.
Where is it required to be stored?
Servers located in India.
13. Digital Lending
On-Balance Sheet
Tech-enabled lending using
own platform
Tech-enabled lending using
others’ platform
Co-lending
Off-balance sheet
Credit default Swaps
Default loss Guarantee
Models In Digital Lending
14. • Financial entity creates an online
interface (app/website) through
which it interacts with the customer
• Usual lending process is carried out
through the interface
Lending through Own Platform
• Financial entity lists its loan products
on the online interface of any other
financial entity or service provider
• If the customer intends to avail the
loan product, the platform entity
provides the details of the customer
to the lender and facilitates the
lending process between them
• The platform entity usually charges a
fee for providing these services
Lending through others’ platform
• Two or more financial entities
agree to roll out a loan product
in which each of them will take
exposure on the borrower
• One of them undertakes the
entire processing of the
transaction while the other’s
role is limited to providing
funding
Co-lending
On Balance Sheet Lending Models
The platform/digital lenders takes a direct exposure on the borrower
Platform undertakes sourcing, origination, KYC, credit evaluation, collection and recovery and CIC
reporting
Platform has to be a financial institution
Essentially, this is digitization of the lending function of the financial institution
15. This is a marketplace lending structure, where platform
provides off-balance sheet support to financial entity on
customers sourced through the platform
Off balance sheet support is in the form of credit guarantee
or other forms of loss support on loans originated through
the platform:
Usually the sourcing platform provides guarantee
And sweeps the excess over a pre-agreed rate of return
The loan is in the books of financial entity
The platform undertakes sourcing, collection, credit
evaluation, collection and recovery services subject to
compliance with RBI guidelines
The liability of the platform materializes on happening of a
pre-agreed credit event
The platform may or may not be a financial
institution
The platform receives fees and commission including
for sourcing and other services including premium
for off-balance sheet support
Guarantee provided by the platform:
DLG
Effectively, if the platform is taking the full risk of
variability of the cash-flows, and sweeps all the
returns over a pre-fixed rate of return, the eventual
lender is assuming an exposure on the platform
The transaction amounts to “synthetic” lending by
the platform
If the lender is exposed to the platform, then the
platform has a loan-type liability; keeping the asset
off the books of the platform seems questionable
Off Balance Sheet Lending Models
16. Default Loss Guarantee
DLG is a contractual agreement between RE and a qualified entity that guarantees compensation for default-related losses.
DLG arrangements are only permitted with LSPs or other REs with whom the RE has an outsourcing arrangement.
DLG arrangements must be governed by a legally binding contract between the RE and DLG provider.
Applicable to Regulated Entities (REs) conducting digital lending operations.
REs will accept DLG in the form of cash, fixed deposits with a Scheduled Commercial Bank, or a bank guarantee in the RE's
favor.
The total DLG coverage on outstanding loans should not exceed five percent of the outstanding loan portfolio.
Unless the borrower makes the payment earlier, RE must initiate DLG within 120 days of the due date.
The duration of the DLG agreement should not be less than the longest tenor of loans in the underlying loan portfolio.
17. Key Fact Statement
• Details of APR
• Cooling- off period
• Terms and Conditions
of the Recovery
Mechanism
• Details of the GRO
and the nodal officer.
• Format in Annex II
Annual Percentage
Rate
• Effective annualized
rate charged to the
borrower of a digital
loan.
• Includes: -
• cost of funds,
• credit cost and
operating cost,
• processing fee,
• verification charges,
• maintenance charges.
• Excludes:-
• Any contingent
charges
• penal charges,
• late payment charges,
Cooling-off period
• Time window given
to the borrower to exit
the loan
• Determined by the
board
• Loan tenure:-
• Less than 7 days – at
least 1 day
• More than 7 days-
atleast 3 days
• Prepayment of loan
without the
prepayment penalty.
• Proportionate APR
may be charged
Increase in the credit
limit
• Automatic increases in
credit limits - explicit
consent of the
borrower..
• When is the consent to
be obtained?
• For each increase in
limit,
• Before the increase in
limit is effectuated
• One time umbrella
consents hall not be
sufficient
• Consent should be
positive consent
• Deemed consent or
statement that unless
borrower denies limit
would be increased
would not be sufficient
compliance
Grievance Rederessal
•REs and the LSPs to
appoint nodal GRO.
•Contact details of GRO
and the manner and mode
of lodging complaint must
be made available
prominently on the
website of: RE, LSP and
DLA
•KFS to also carry such
information.
•If the complaint is not
addressed within 30days,
complainant may lodge a
complaint:
•Over the Complaint
Management System
(CMS) portal
•Other prescribed modes
under the Reserve Bank
Integrated Ombudsman
Scheme (RB- IOS.
Consumer Protection under Digital Lending
